{"id":6111,"date":"2024-08-29T11:58:38","date_gmt":"2024-08-29T06:28:38","guid":{"rendered":"https:\/\/zv3d.wpengine.com\/us\/?p=6111"},"modified":"2024-09-03T15:01:42","modified_gmt":"2024-09-03T09:31:42","slug":"rewriting-indias-emi-rulebook-with-clou","status":"publish","type":"post","link":"https:\/\/www.zeta.tech\/us\/resources\/blog\/rewriting-indias-emi-rulebook-with-clou\/","title":{"rendered":"Rewriting India\u2019s EMI Rulebook With Credit Line on UPI (CLOU)"},"content":{"rendered":"

Contents<\/strong><\/p>\n

    \n
  1. Transforming Loan Repayments: The Shift from EMIs to EPIs
    \n<\/strong><\/a><\/li>\n
  2. Cashflow-Based Financing for Cashflow-Dependent Borrowers<\/strong><\/a><\/li>\n
  3. The Road Ahead: Unlocking A New Era Of Credit In India<\/strong><\/a><\/li>\n<\/ol>\n

    For millions of Indians, the traditional model of loan repayments is more of a burden than a benefit.\u00a0<\/span><\/p>\n

    In a country where only 19% of the working-age population (aged 24 – 64) has regular employment1<\/sup><\/a><\/span>, traditional loan repayments can feel like a trap rather than a financial solution. The reality for most Indians – freelancers, gig workers, and small business owners – doesn’t align with the rigid structure of Equated Monthly Installments (EMIs). These individuals often face the stress of missed payments, leading to penalties, a significant drop in credit scores, and ultimately, more costly credit.\u00a0<\/span><\/p>\n

    In fact, a missed EMI can cause a credit score to drop by as much as 70 points2<\/sup><\/a><\/span>, creating a vicious cycle where the inability to secure loans from regulated sources forces them into the unregulated market, where financing costs can more than double. Image 1 highlights the debt spiral created through missed EMIs.<\/span><\/p>\n

    Image 1<\/p>\n

    \"downward<\/p>\n

     <\/p>\n

    For banks, the challenge is equally daunting. EMIs are an important way of managing complex collection operations and the risk of lending. Existing systems, built for physical scale, struggle to accommodate the evolving needs of a digital-first economy. Increasing the frequency of repayments to fortnightly, weekly, or daily would drive up the complexity and overheads of collections. Similarly, moving away from equated installments would throw amortization schedules, fee calculations, and ledger balances into chaos. With the rapid digitization of credit through UPI, however, there’s an imminent need for such a shift.<\/span><\/p>\n

    Enter Credit Line On UPI (CLOU)\u2014a solution poised to bridge this gap. CLOU’s digital-first repayment model promises to reduce the overheads and complexities of offline collections. We believe this opens up the possibility of moving away from equated <\/span>monthly<\/span><\/i> installments to more frequent, smaller repayments that would suit more borrowers. Slightly farther on the innovation horizon, we believe CLOU can also enable true cashflow-based financing for Indians, allowing them variable repayments based on variable cashflows. We explore both possibilities in this blog.<\/span><\/p>\n

    Transforming Loan Repayments: The Shift from EMIs to EPIs<\/span><\/h2>\n

    CLOU can unlock a paradigm shift in credit repayments, a move away from the traditional EMI model to a more flexible and adaptive Equated Periodic Installments (EPIs) that better match the income cycles of borrowers.\u00a0<\/span><\/p>\n

    Consider the status of the gig workers in India. Research shows that 59% of India\u2019s gig workers are paid weekly, while the rest receive daily wages, with a median income of Rs. 200,000 ($2400) per year3<\/sup><\/a><\/span>. The higher end of the gig economy in India has a lot more borrowing power, with tech talent getting paid $5 per hour for basic work and up to $400 per hour for specialized work by senior AI engineers4<\/sup><\/a><\/span>.<\/span><\/p>\n

    With EPIs, borrowers could have the flexibility to make repayments on a schedule of their choice – <\/span>weekly, bi-weekly, or even daily –<\/span> depending on what best suits their financial situation. This flexibility reduces the stress associated with meeting rigid repayment schedules and helps borrowers avoid defaults.\u00a0<\/span><\/p>\n

    For banks, this can open up new customer segments without a significant increase in collection risk or overheads. CLOU allows borrowers to make repayments seamlessly through their existing UPI apps, with each repayment automatically allocated to their credit lines. From a systems readiness perspective, banks need to ensure:<\/span><\/p>\n